The Money Tree

Safely Generating Income in Retirement

Archive for April, 2011

Options Screener

Posted by mounddweller on April 28, 2011

Fellow Traders,

Those of you who regularly keep up with the comments section of my posts know that recently I have been exchanging messages with a new reader, Vijay.  Vijay would like to develop a Deep OTM NP Strategy of his own using LEAPS.  One of the criteria he uses to search for potential trades is the greek, Delta.  Some of you may already know that Delta is often used as a close approximation for the probability that an option will finish ITM. 

While I personally don’t use any of the greeks to screen for good trades I know other successful traders who do.  One of these is my investing buddy, Patrick, over at http://www.mtrig.com/.   The reason I mention Patrick is because he has built a terrific option screener with many selection criteria available to the user, including the greek Delta which he labels as POA (Probability of Assignment).  Below you’ll find a screen shot of his screener.  Vijay, I used your < 20% POA value as one of my selection criteria.  You’ll note the screener returned over 1200 options meeting that criteria.  I also limited the screen to focus only on large-cap stocks.

If you like what you see, give my buddy Patrick a shout.  FYI, I receive no compensation from Patrick for commenting on or endorsing his site.

Regards,

Troy

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Deep OTM NP Strategy – MAY Week 4

Posted by mounddweller on April 24, 2011

Fellow Traders,

Happy Easter!

We have a total of 7 trades which met our selection criteria, 3 are mid-caps and 4 are small-caps.  Most have shown up on our screen previously at one time or another.  The three exceptions are LIZ, PTIE, and TRGL. 

In running through through the vetting and DD process I use for these type of trades none of the selections jumped out at me as being a great trade.  When these situations occur (and they frequently do) I generally go back to the selections from the prior week and see which, if any, remain viable trade candidates.  Doing so this week returned me to AMSC.  Last week it closed at $12.81 and the $10 strike made our selection criteria.  This week it fell further, closing at $11.74.  The $9 strike has a bid of $0.10.  The $9 strike is also less than the $9.86 book value of AMSC.

Up above I referenced the vetting and DD process I use for my Deep OTM NP Strategy trades.  It is relatively quick.  I focus in two primary areas, (1) the one-year price chart of the underlying stock, and (2) that company’s most recent financial statements.

On the 0ne-year price chart I look at a few items, the 52-week hi and low, areas of previous price support, and where the current price is relative to the first two items.  I use these items to help me ascertain if now is a good time to trade the stock.  Stocks that are closer to their 52-week lows than their highs interest me.  Right or wrong I believe they have less distance to fall before value investors step in and begin buying the stock.  I also like selections where the strike price is below areas of previous support.    

On the company’s financial statements I look at profitability, cash flow, and net cash.   Trades where the underlying company is profitable, or at least generating positive cash flow generally rate higher than those that don’t.  If the company is neither profitable or generating positive cash flow then the amount of cash on the balance sheet takes on great importance.

I believe the first set of criteria help me pick trades that will expire OTM.  The second set of criteria are important for when I’m wrong about the trade.  If I can’t extricate myself from a losing trade prior to expiration and I end up having a stock put to me, I want to feel comfortable having it in my portfolio for some period of time.

Regards,

Troy

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Shaking the Money Tree…Again!

Posted by mounddweller on April 20, 2011

Fellow Traders,

You’ll recall over this past weekend I shared the results of my trading activity in Exelon (EXC).  My strategy in that trade was to sell puts and calls on EXC as it cycled up and down around its regular quarterly dividend cycle.  Today I want to share my results using a slightly different strategy with INTC.

Below is a one-year chart of INTC.  You’ll notice it hasn’t done much lately.  A buy and hold investor would have been hard pressed to earn a profit even after taking dividends into consideration.

However, to a put seller this chart is a dream come true.  I have been selling puts on INTC at the $19 strike price since last August.  My strategy is to sell the puts as INTC approaches resistance at $19 and then either (1) let them expire OTM, or (2) buy them back if I’ve captured 80% or more of the premium and there is a substantial amount of time remaining prior to expiration. 

In the “score card” below you can see this has worked remarkably well.  In just 8 months I have made almost $1,200  on a capital base of just $9,500. 

You can see I took advantage of the big gap up today.  I bought back the MAY $19 puts that I had sold just two days before.  If the stock reverses and tries to fill that gap I may get a chance to sell a second round of MAY $19 puts before expiration.  Wouldn’t that be grand! 

I would be remiss if I didn’t give some if not most of the credit for my success in this trade to Teddi over at www.fullyinformed.com.  A couple of years ago I wouldn’t have seen the beauty of this trade.  I was still stuck in the mind-set of trying to hit it out of the park every month by looking for hot trades that returned 3-5% every month.  Through Teddi I have learned to better apply the old adage “slow and steady wins the race!”  Try it out, find a stock you wouldn’t mind owning that seems to be stuck in a trading range.  Then, look to “shake the money tree” for 1 to 2 percent a month.  The annualized ROIC is fantastic and you’ll sleep well at night.

Regards,

Troy

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Shaking the Money Tree

Posted by mounddweller on April 17, 2011

Fellow Traders,

Before I jump into the purpose of this post I want to let you know that I have updated the Historical Results and Open Positions tabs on my blog to reflect activity through expiration on April 16th.

In updating my records to reflect trading activity this month I noticed it had been exactly one year since I first initiated my position in Exelon (EXC).   Exelon is a nuclear utility which operates primarily in Pennsylvania and Illinios.  It pays a quarterly dividend of $0.525 or $2.10 annually for a current yield of 5.2%.

Like a lot of other stocks EXC has gone nowhere in the past 12 months.  However, between collecting 3 quarterly dividends and shaking the money tree every few months I have been able to generate a decent return.  Specifically, I have generated an annualized ROIC of 13.57%.   Below is a “scorecard” of my transactions which shows how I did it.

Exelon tends to drift up in price in the week or two immediately prior to going ex-dividend.  Then, like alot of high dividend stocks, it tends to fall for a couple of weeks after the ex-date.  My strategy with Exelon has been to try to exploit these tendancies by selling calls immediately prior to the ex-date and selling puts after the stock has appeared to bottom out.  As you can see in the scorecard this doesn’t always work out.  However, my goal is that over time I will gain more experience and get better at timing these events.

As you can see my most recent trade, selling the APR $40 puts, expired OTM.  I had hoped to have the stock put to me at that price thereby increasing my position from 200 to 500 shares.  However, I am in no hurry.  Thus, since the APR puts expired OTM, I will wait for the next down day to sell the JUN puts.  The strike price I choose will be dependent upon the stock price at that time and the premiums available at the various strike prices. 

Exelon should be declaring it’s next dividend very shortly.  The 2nd quarter ex-date is generally around the 10th-12th of May.  If you like the strategy I just layed out now could be a good time to start a position in EXC.  I would start by buying  Exelon stock at the current price, then as we get closer to the second week of May I would look to sell CCs three months out. 

One last comment, often it is possible to buy back the puts and calls at a substantial profit well before their expiration date.  Doing so frees up capital while also giving you the possible opportunity to do the trade again later if the stock  moves up or down fairly quickly.

Regards,

Troy

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Deep OTM NP Strategy – MAY Week 5

Posted by mounddweller on April 16, 2011

Fellow Traders,

Below is the list of the trades meeting our Week 5 criteria.   We haven’t had a “Week 5” for quite some time so let me refamiliarize you with how this occurs and the criteria we use for the Week 5 selections.  First, a “Week 5” occurs only a couple times a year.  It occurs when there are literally 5 weeks between expiration dates on the options calendar.  Given the extra week to expiration (hence, an additional week of exposure to market and stock risk) we increase our requisite DSP to 20%.  The put factor (PF) remains the same at 2.0. 

As you can see we have 24 selections meeting our Week 5 criteria.  I have highlighted four that I found to be interesting and worth doing some DD on.  The two highlighted in green, AMSC and RMBS, are my best bets.  LFT and ANW, highlighted in orange, are in my mind much riskier but also worth a look.

American Superconductor (AMSC) had a precipitous fall earlier this week when its largest customer (70% of revenue) stopped taking delivery on any more AMSC product.  There’s nothing wrong with AMSC’s product, it appears their customer’s business is slowing down and they have too much AMSC product in inventory. 

Here’s why I like this AMSC trade.

(1) At a strike price of $10 you have over 23% of additional DSP on a stock that has already fallen 49% in the past week.

(2) The bad news is already priced into the stock.  While it could fall further, I have a hard time believing it will fall another 23% in 5 weeks.

(3) The book value of the stock is $9.86.  If you have the stock put to you at $10, you’ll own it at book value.

(4) Almost half of the $9.86 book value is cold, hard cash in the bank; not intangible or illiquid assets.

(5) After the big drop in price this week an insider stepped up to the plate and increased his holdings in AMSC by $50M.  I don’t think he would do that unless he thought it was a great buy at the current price.

Next up is Rambus (RMBS).  I’m not going to say much about it since it was in our selections last month as well and I wrote about it then.  The stock is up about 4% from where it was back in March.  Here’s why I like it:

(1) The ROIC at 2.83% is fantastic given the over 22% DSP.  However, this is due to RMBS announcing earnings next week.  Despite the impending earnings release I still like this trade. 

(2) The stock has not seen $16 since November of 2009.  Also, it has strong support at $16 as it bounced off of this level 4 times between August and November 2009.

(3) RMBS has a strong balance sheet with almost $4/share in net cash.

A quick note or two about the riskier plays I mentioned.  LFT is a Chinese mid-cap stock.  It sells software to financial services companies.  It has sold off hard due to fear of what could happen to its business should the Chinese real estate market falter.  That isn’t an insignificant risk given the government’s rise in interest rates to keep inflation at bay.

The other risky play is ANW.  It provides marine fuel logistics services.  What caught my eye about it is that it is trading at 0.8x book value.  While that doesn’t mean it can’t fall further it does tell me it is more likely to tread water at this level than fall much further to the selected $7.50 strike price.

Best of luck to all of you in the coming month. 

Regards,

Troy

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What Others Are Trading – April 2011

Posted by mounddweller on April 15, 2011

Darn!  I messed up.  Here we are already half way through the month and I am just now posting my monthly message for y’all to tell me about what you’re trading.

Well, better late than never I suppose.  Anyone got any trades they want to brag about or lament on?

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Yahoo Group – Come Join Us!

Posted by mounddweller on April 15, 2011

Fellow Traders,

I would like to draw your attention to something new on my blog.  I have joined forces with my friend and investing buddy Teddi over at www.fullyinformed.com.  I am now co-moderating her Yahoo message group CoveredCalls-NakedPuts_OptionStrategies.  There is a link on the left-hand side of my blog which will take you to the member sign-up page.  This group has over 360 members who are focused on one thing, learning about and discussing various covered call and naked put trading strategies. 

Come join the group.  I am confident anyone, both newbies and veterans alike, will find a topic of interest or perhaps a new “tool” to put in their trader’s “toolbox”.

Regards,

Troy

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Deep OTM NP Strategy – APR Results

Posted by mounddweller on April 15, 2011

Fellow Traders,

WOW!  What a difference a month makes!   The results are in for the month of April and they are sensational. 

As you’ll recall last month volatility was up and so was the number of our trade selections that finished ITM.  As a matter of fact it was the highest ever since I started testing this strategy.  Fully 25% of last months Deep OTM NP trades finished ITM.   

This month was just the opposite.  Our success rate was virtually the highest it has ever been.  Only 2 of 45 (4.44%) of our Deep OTM NP trades finished ITM.   Those two “losers” had total losses of $427.90.  The total income obtained this month had you executed all 45 trades would have been $6,163.50.  Executing all 45 trades would have required $319,350 in capital (assuming these were cash secured puts).  Thus, the ROIC, net of all losses, was 1.80% (22.6% annualized).

Now, as I said last month, I do not think it wise to blindly enter any or all of these trades.  The results this month do not change my position on that subject.   The selection criteria yield a list of opportunities.  It is up to the trader, after doing ample due diligence, to decide which, if any, are at or below his or her risk tolerance level.

I’ll be back with another post later this weekend with the MAY Week 5 (there are 5 weeks between expiration dates this cycle) selections.

Regards,

Troy

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New NP Trades

Posted by mounddweller on April 13, 2011

Fellow Traders,

I made a couple of NP trades over the past couple of days that I want to update you on.  One is a very conservative trade on a true blue-chipper, MSFT.  The second one undoubtedly involves a substantially greater amount of risk.  It is with the high-flying mid-cap networking company Riverbed Technology (RVBD).

First up let’s look at my MSFT trade.  Yesterday (4/12) with MSFT trading at $25.59 I decided to STO 5 MAY $24 puts at $0.26.  My ROIC is 1.083% with 38 DTE and 7.15% DSP.  Here’s why I like this trade; look at the chart below of MSFT’s trading history for the 9 years.  It has gone nowhere.  It peaked in October of 2007 at $37 and fell to about $15 in March 2009.   Eliminate those peaks and valleys and it essentially has been range bound between $23 – $30.  With MSFT currently trading in the bottom of this band selling the MAY $24 puts seems like a pretty safe trade.

My objective in this type of trade is to generate a 12-15% annualized ROIC.  The strategy for achieving this objective is to sell near month puts on safe, large-cap stocks.  If the puts expire OTM and the stock is still in the bottom of the range I’ll repeat the trade next month.  If the puts finish ITM I will accept assignment and sell near month ATM calls against those shares.

My inspiration for doing this type of trade comes from my investing buddy, friend, and mentor Teddi over at www.fullyinformed.com.  Check out her recent article on how her trades in MSFT have outperformed gold over the past few years. 

Now let’s look at my more speculative NP trade in RVBD.  This is strictly an opportunistic trade.  Strike when the iron is hot.   My regular readers will recall Riverbed Technology (RVBD) appeared on our Deep OTM NP Strategy selection last month.  The stock was at $41.25 when I sold 3 MAR $35 puts for $0.45.  Those puts expired OTM.  Since then I had been keeping my eye on RVBD.  The stock price had continued to fall, closing yesterday at $30.92.  After the close yesterday afternoon they pre-announced their 1st quarter results.  Sales were up over 45%.  They are stealing business away from CSCO.  Anyway, the stock gapped up at the open this morning at over $35.  I took advantage of this by placing the following trade: STO 2 MAY $30 puts at $0.75.  My ROIC is 2.5% with
over 16.5% DSP.  The strike is below recent lows.  The PF at the time of my trade was 2.0.

My objective in this trade is simply to generate a generous ROIC relative to the amount of risk I believe I am taking.  The strategy involved is just taking advantage of opportunities as they present themselves in the market.  As I mentioned earlier this trade is not without substantial risk.  RVBD has been on a tear over the past year.  It had gone up almost 200% (from $15 to $45) in the past year before starting to fall back to earth a month or so ago.   

Regards,

Troy

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Deep OTM NP Strategy – APR Week 1

Posted by mounddweller on April 9, 2011

Fellow Traders,

Bad news!  Not a single new trade met our selection criteria this week.  That hasn’t happened before.  I suspect the culprit is the low amount of volatility in the market as measured by the VIX.  It closed Friday at 17.87.

While there weren’t any new selections a number of stocks from earlier selections this month did reappear.  The one that most interested me was RMBS.  It closed Friday at $19.35.  The APR $17 put has a bid price of $0.11.  Thus, with only 5 DTE you can get a 0.65% ROIC with 12.7% DSP.

If the bid price holds up at the open on Monday and I can sell for $0.11 I may sell a few of these.

Regards,

Troy

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